Hospitals saw more megamergers in the last quarter. Kaufman Hall explains why

Hospitals and health systems only had seven mergers and acquisitions in the third quarter of the year, but the expected revenue surrounding those deals was $5.2 billion, a new report says.

The report, released Wednesday from Kaufman Hall, is the latest evidence that larger hospital systems are seeking strategic partners to help overcome financial impacts of the COVID-19 pandemic. But as more larger systems join forces, smaller and independent hospitals are declining.

“The pandemic has focused attention on new care delivery models—including virtual health and hospital at home—that are less dependent on specific sites of care and alleviate pressures on healthcare facilities that have been pressured by surges in COVID-19 patients,” the report said.

In the third quarter, there were seven transactions involving 20 hospitals. That was far below the nearly 20 deals that were closed in the third quarter of 2020 and the 25 deals closed in the same period in 2019.

But the deals themselves represented a large amount of money. For instance, they include the massive $11 billion megamerger between Utah-based Intermountain Healthcare and Colorado-based SCL Health along with HCA Healthcare’s planned acquisition of five hospitals in Utah.

“The smaller number of transactions is being offset with a high percentage of transactions with seller revenues in excess of $500 million,” the report said.

The average seller size by revenue for the quarter was $736 million, which is more than double the $346 million average for 2020, Kaufman found.

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Results from the third quarter show a continuing trend of hospitals and health systems that are looking more for a strategic partner than an outright expansion.

“Health systems increasingly seek a transformative impact from M&A activity—not just the acquisition of another facility, but the addition of new capabilities or access to new markets,” the report said.

Instead of seeking to expand its market presence, hospitals are looking for partners that can help them expand into new models of care such as telehealth and hospital-at-home. Hospitals are looking intently at value-based care arrangements considering revenue shortfalls triggered by the pandemic.

“The vulnerabilities of volume-dependent fee-for-service payment models have been exposed, renewing interest in payer-provider partnerships for value-based payment structures,” the report said.

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Hospitals are also looking into post-acute care models to ensure care for patients after they leave their facility. For example, HCA Healthcare acquired 80% of Brookdale Senior Living’s home health and hospice business. Another deal between UNC Health and Medically Home Group developed an “acute care at home” program, Kaufman said.

However, the downside of this integration has been fewer independent community hospitals. Kaufman found that the number of unaffiliated and independent community hospitals is shrinking. 

"The most recent data from the American Hospital Association, based on its 2019 Annual Survey, indicates that 67% of the 5,141 community hospitals are already part of a system," the report said.

The push for expanding into other models of care comes as hospitals continue to struggle with COVID-19 surges, putting further strain on inpatient facilities.

But larger deals could also bring more government scrutiny. The Federal Trade Commission has ramped up its scrutiny of hospital mergers to explore how the deals would impact quality and prices for a market.

President Joe Biden issued an executive order back in July that calls for federal agencies to review and revise the guidelines for hospital mergers that can lead to higher prices.